Retirement Planning Basics

Linda S. Melancon, Attorney at Law
Legacy Center of Louisiana, LLC
Prairieville, Lousiana  70769
225-744-0027 

Member of the national ElderCare Matters Alliance, Louisiana chapter

While it may be the rare individual who can afford to retire during the "Great Recession," for those close to retirement age or contemplating retirement, a basic understanding of retirement planning terms and options is imperative. There are many different things that you need to understand regarding retirement planning, but some of the most important are: understanding what type of plan you have and when distributions can or must be taken; understanding spousal rights in employment plans; understanding social security retirement benefits; and understanding if and when any unused retirement benefits will pass to your heirs.

Member of the national ElderCare Matters Alliance, Louisiana chapter

 

While a discussion of all the different types of retirement plans is beyond the scope of this article, you should be familiar with some of the broad categories of plans. First, a plan may be a qualified plan or a non-qualified plan. A qualified plan is one that complies with certain IRS rules and it has favorable tax treatment for both the employer and the employee. Your 401(k), 403(b), Keogh, SEP, IRA, SEP and SIMPLE plans are all qualified retirement plans. A non-qualified plan is one that does not receive the favorable tax treatment afforded qualified plans, but they also are not subject to all of the rules of qualified plans. Most retirement plans are qualified.

Retirement plans are also broken into two other broad categories – defined benefit plans and defined contribution plans. A defined benefit plan provides the employee with a fixed or defined payment at retirement. Typically, this will be a monthly payment. The amount received by the employee may vary depending on the years of service, the age of the employee at retirement or the salary of the employee at retirement, but it will not vary based on the performance of the stock market. Many large employers offered defined benefit plans in the past but today they are most often seen in union-sponsored and government-sponsored retirement plans.

The more common type of plan seen today is the defined contribution plan. This type of plan does not promise a fixed payment upon retirement, but is instead based upon the amount of money that the employee and employer have contributed to the employee's account. The most common defined contribution plan is the 401(k). In a 401(k), the employee elects to authorize a portion of his salary to be contributed to the plan and the employer typically matches that contribution to some extent. A 403(b) plan is similar to 401(k) plan but it is for employees of public schools and tax-exempt educational, charitable and religious organizations.

As stated earlier, a defined benefit plan pays a certain amount each month. Upon death, the plan often continues to pay to your spouse, although the spouse's benefit may be a reduced amount. Since the spouse is entitled to benefits under these plans, there consent is usually needed when determining how the plan will pay out. When the surviving spouse of the employee dies, payments cease.

With a defined contribution plan, you get to decide how much you are going to withdraw subject to certain rules. Typically, if you withdraw any amounts from your defined contribution plan prior to age 59 1/2 there will be penalties associated that must be paid. Further, in the year after you reach 70 1/2 you must start taking required minimum distributions or you will be penalized. At death, any amounts remaining in your defined contribution plan, will generally pass to your spouse or other heirs through a beneficiary designation. Defined contribution plans covered by ERISA, a federal law that deals with retirement plans and preempts state law, will usually require spousal consent to designate someone other than the spouse as the beneficiary of the plan assets. Plans not covered by ERISA may not, although in community property states such as Louisiana, the plan's administrator may still require spousal consent.

As you can see, retirement planning can be complicated and the concepts presented here are just the tip of the iceberg. If you are nearing retirement age, it is important to get expert advice from professionals who regularly deal with these issues to make sure you are protected during your retirement and that your heirs will receive the maximum benefit from any retirement benefits that you leave for them.